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Futures squeeze: Comm traders forced to pay more

FOR INDIA’S COMMODITY traders, the test of courage is not to die, but to endure. The new commodity transaction tax (CTT) and service tax on commodity exchanges will increase the cost of futures trading by at least four times. While big hedgers and arbitrageurs may be able to offset CTT against their net business profits, small investors and punters will see their gains dwindling.
Even for companies able to offset CTT, there would be an overall increase in the tax paid because CTT would be deducted from net profit, and not the net tax payable. Suppose, a company has to pay a CTT of Rs 100. It makes a net profit of Rs 500 on which the tax liability (at 33%) would be Rs 165. Earlier, tax laws allowed Rs 100 to be deducted from Rs 165, leaving the company to pay only Rs 65. Now, CTT would be deducted from the net profit of Rs 500, and the company would pay tax on Rs 400, which comes to Rs 132. So, the net outgo is higher.
Not surprisingly, India’s commodity exchanges are peeved at this indirect onslaught on their business at a time when average daily turnover barely crosses Rs 15,000 crore. “CTT needs to be brought down. Otherwise, it will drive away participants from this market and distort the price discovery mechanism,” said NCDEX MD PH Ravikumar.
Said MCX chairman Jignesh Shah: “The Budget has added an incidence of 12% service charge and Rs 17 per lakh for commodities trading, which will increase the cost by more than 800%. This taxation was introduced in the stock market with the benefit of capital gains and allowing futures income loss to be treated as business income loss. The commodities market has not received these two incentives.”